UPSC Articles
Microfinance institutions can now set interest rates
Part of: Prelims and GS-III Economy
Context: The Reserve Bank of India (RBI) allowed microfinance institutions the freedom to set interest rates on the loans that they lend.
Key takeaways
- The guidelines will take effect from 1st April 2022.
- The RBI tweaked the definition of a microfinance loan to indicate a collateral-free loan given to a household having annual income of up to Rs. 3 lakh.
- Earlier, the upper limits were Rs. 1.2 lakh for rural borrowers and Rs. 2 lakh for urban borrowers.
- There shall be no prepayment penalty on microfinance loans.
- Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount.
Microfinance institutions
- Microfinance offers a solution to small business owners, who do not have access to banking and associated services.
- These institutions offer services similar to that of a bank.
- They do charge interest on loans but the interest rate is lower than that charged by most banks in the country.
- They help small- and medium-sized businesses scale up with access to funds at the right time.
- They worked as an alternative, with an aim to create financial equality.
- In India, there are two channels through which microfinance operates:
- SHG – Bank Linkage Programme (SBLP)
- Microfinance Institutions (MFIs)
News Source: TH
